SUPREME COURT 

OF 

NEVADA 

130 Nev., Advance Opinion 15 

IN THE SUPREME COURT OF THE STATE OF NEVADA 

FEDERAL INSURANCE COMPANY, 

Appellant/Cross-Respondent, 

vs. 

COAST CONVERTERS, INC., 

Respondent/Cross-Appellant. 

No. 59639 

MED 

DEC 2 4 2014 

TAC'E K. I INDEHAN 

E' 

dropH „IC 

CHRiF GE ( EEL (K 

Appeal and cross-appeal from a judgment on a jury 

finding an insurance company liable for breach of contract and violation of 

the Nevada Unfair Claims Practices Act. Eighth Judicial District Court, 

Clark County; Gloria Sturman, Judge. 

Vacated in part, reversed, and remanded. 

Lewis Roca Rothgerber LLP and Daniel F. Polsenberg and Joel D. 

Henriod, Las Vegas; Pyatt Silvestri and James P.C. Silvestri, Las Vegas, 

for Appellant/Cross-Respondent. 

Lee, Hernandez, Landrum, Garofalo & Blake, APC, and David S. Lee and 

Robert A. Carlson, Las Vegas; Lemons, Grundy & Eisenberg and Robert L. 

Eisenberg and Tiffinay B. Pagni, Reno, 

for Respondent/Cross-Appellant. 

BEFORE THE COURT EN BANC. 

OPINION 

By the Court, GIBBONS, C.J.: 

This case involves a dispute between an insured manufacturer 

and its insurer. In the present case, electrical problems at a plastic bag 

manufacturing plant led to damaged machinery and an increased number 

of defective bags being produced. Following the electrical problems, the 

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manufacturer filed a claim with its insurance company. However, a 

dispute arose between the parties regarding whether losses associated 

with the defective bags should be covered under the insurance policy's 

property damage provision or its business interruption/extra expense 

provision. The parties further disputed whether a policy limit of $2 

million or $5 million should apply to the manufacturer's property loss. 

The district court submitted both of these issues to the jury. Following 

trial, the jury awarded the manufacturer $4,005,866 for breach of the 

insurance contract, impliedly finding that the insured's loss was property 

damage and that the $5 million property damage policy limit applied. 

In this opinion, we first address whether categorizing the 

insured's loss under the policy presents a question of law or a question of 

fact. We conclude that categorizing the insured's loss under the policy is a 

question of law. Second, we address whether determining which policy 

limit applies to the insured's property loss presents a question of law or a 

question of fact. We conclude that determining which policy limit applies 

presents a question of law. Accordingly, we conclude that the district 

court erred in sending these questions to the jury. We therefore reverse 

the district court's judgment and remand this matter for further 

proceedings consistent with this opinion. 

FACTS AND PROCEDURAL HISTORY 

Respondent/cross-appellant Coast Converters, Inc., 

manufactured plastic bags in California. In 2003, Coast began moving its 

plastic bag factory, including machines and equipment, from California to 

Las Vegas. Corresponding with the move, in June 2003, Coast obtained a 

commercial package all-risk insurance policy from appellant/crossrespondent Federal Insurance Company. The insurance policy covered up 

to $2 million in property damage (PD) and up to $1.75 million for business 

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interruptions/extra expenses (BI/EE). On August 27, 2003, Coast 

requested, and later received, an increase in the PD coverage limit from $2 

million to $5 million. 

In anticipation of Coast's move to Las Vegas, electrical 

modifications were made to the Las Vegas facility. However, the 

modifications were apparently inadequate, causing voltage fluctuations. 

The voltage fluctuations damaged machinery used in the manufacturing 

process and also caused the production of a larger-than-normal amount of 

defective bags, or "scrap." 

Coast filed a claim with Federal Insurance, seeking to recover 

costs related to the damaged machinery and the production of increased 

scrap. Coast pointed out that the defective bags were often hidden in rolls 

of otherwise quality bags, rendering the defective bags largely 

undiscoverable prior to sale. While it was able to pull some of the rolls 

containing defective bags, Coast claimed that it was not made aware of the 

defects until several orders were returned. Thus, Coast asserted that it 

was unable to separate the defective bags from the quality ones, rendering 

the entire package of bags a total loss. 

Upon receiving Coast's claim, Federal Insurance investigated 

the machine malfunctions and eventually made several payments to 

Coast. Initially, Federal Insurance did not communicate under which 

provision, PD or BI/EE, the payments were made. Federal Insurance later 

allocated a small portion of the payments—relating to the damaged 

machinery—to the PD coverage. However, the majority of the payments, 

including payments for the increased scrap, were made under the BI/EE 

coverage. Ultimately, Federal Insurance disbursed amounts covering the 

increased scrap and other losses up to the entire $1.75 million BI/EE 

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policy limit Coast contended that the increased scrap losses should have 

been covered under the PD provision. However, Federal Insurance 

disagreed and refused to make any additional payments under the PD 

provision. Coast alleges that it ultimately went out of business as a result 

of Federal Insurance's refusal to pay. Coast then filed a complaint against 

Federal Insurance. 

Both before and after trial, Federal Insurance asked the 

district court to determine (1) whether Coast's loss fell under the policy's 

PD provision or the BI/EE provision; and (2) if PD coverage was 

appropriate, whether the coverage limit was $2 million or $5 million. The 

district court, however, declined to answer these questions, opting instead 

to leave them to the jury. After a five-week jury trial, the jury found 

Federal Insurance liable in the amount of $4,005,866 for breaching the 

insurance contract and in the amount of $5,048,717 for violating the 

Nevada Unfair Claims Practices Act (UCPA), NRS 686A.310. The district 

court offset the judgment by amounts Coast obtained in settlement for its 

claims against other parties. The district court, however, refused to offset 

the judgment by the amount already paid on the increased scrap 

insurance claim, and awarded Coast attorney fees and prejudgment 

interest. 

Federal Insurance now appeals, arguing that (1) the district 

court erred in refusing to rule, as a matter of law, on the policy coverage 

and policy limit issues, as well as on the UCPA claims; (2) substantial 

evidence does not support the jury's findings on the breach of contract and 

UCPA claims; (3) the jury erred in finding it liable under the UCPA; (4) 

the district court erred in refusing to offset the judgment by the amount 

already paid on the claim; and (5) the district court erred in granting 

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attorney fees as special damages. Coast cross-appeals, arguing that the 

district court erred in offsetting the judgment by amounts obtained in 

settlements and in its calculation of prejudgment interest. 

DISCUSSION 

Categorizing Coast's loss under the policy was a question of law for the 

district court to decide 

Federal Insurance argues that the district court erred in 

allowing the jury to determine which policy provision, PD or BIJEE, 

applied to Coast's increased scrap. We agree. 

In contract matters, the jury may be charged with deciding 

any factual disputes. State, Univ. & Cmty. Coll. Sys. v. Sutton, 120 Nev. 

972, 983, 103 P.3d 8, 15 (2004). But "in the absence of ambiguity or other 

factual complexities,' contract interpretation presents a question of law" 

for the district court to decide, "with de novo review to follow in this 

court." Galardi v. Naples Polaris, L.L.C., 129 Nev. „ 301 P.3d 364, 

366 (2013) (quoting Ellison v. Cal. State Auto. Ass'n, 106 Nev. 601, 603, 

797 P.2d 975, 977 (1990)); see also Farmers Ins. Exch. v. Neal, 119 Nev. 62, 

64, 64 P.3d 472, 473 (2003) (noting that the task of interpreting a contract 

is a question of law). 

Here, deciding which policy provision, PD or BI/EE, applies to 

Coast's increased scrap is a question of contract interpretation, and thus, 

is a question of law. Because categorizing Coast's loss under the policy is 

a question of law, the district court erred in sending it to the jury. 

Moreover, because the policy provision dispute is a question of law, "[t]his 

court is obligated to make its own independent determinations and should 

not defer to those of the district court." Musser v. Bank of Am., 114 Nev. 

945, 947, 964 P.2d 51, 52 (1998); see also Hartford Accident & Indem. Co. 

v. Wesolowski, 305 N.E.2d 907, 909-10 (N.Y. 1973) (interpreting an 

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insurance policy, even though the issue was wrongly sent to the jury 

below, where the policy was unambiguous and the parties agreed that no 

extrinsic evidence bearing on the parties' intent existed). 

Accordingly, as the parties have fully briefed the legal 

interpretation issue before this court, we will now address whether the 

policy's PD provision or the MEE provision covered Coast's increased 

scrap. 

Interpretation of the insurance policy 

"An insurance policy is a contract that must be enforced 

according to its terms to accomplish the intent of the parties." Farmers 

Ins. Exch., 119 Nev. at 64, 64 P.3d at 473. We consider an insurance 

policy as a whole, giving it a reasonable and harmonious reading. Century 

Sur. Co. v. Casino W., Inc., 130 Nev. „ 329 P.3d 614, 616 (2014). "If 

a provision in an insurance contract is unambiguous, a court will interpret 

and enforce it according to the plain and ordinary meaning of its terms." 

Powell v. Liberty Mut. Fire Ins. Co., 127 Nev. „ 252 P.3d 668, 672 

(2011); cf. Grand Hotel Gift Shop v. Granite State Ins. Co., 108 Nev. 811, 

819, 839 P.2d 599, 604 (1992) (stating that ambiguous or unclear terms in 

an insurance contract are resolved in favor of the insured). "[W]hether an 

insurance policy is ambiguous turns on whether it creates reasonable 

expectations of coverage as drafted." Powell, 127 Nev. at , 252 P.3d at 

672 (quoting United Nat'l Ins. Co. v. Frontier Ins. Co., 120 Nev. 678, 684, 

99 P.3d 1153, 1157 (2004)). This court "will not rewrite contract 

provisions that are otherwise unambiguous . . . [or] increase an obligation 

to the insured where such was intentionally and unambiguously limited 

by the parties." Farmers Ins. Grp. v. Stonik ex rel. Stonik, 110 Nev. 64, 67, 

867 P.2d 389, 391 (1994). 

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Here, prior to determining, as a matter of law, whether 

Coast's increased scrap is covered by the policy's PD provision or the 

BI/EE provision, one factual question must be resolved by the jury: on 

what date did Coast become aware that continued use of its machines 

would result in the production of an increased amount of scrap? We 

conclude that increased scrap produced after this date is covered by the 

policy's BI/EE provision, and increased scrap produced before this date is 

covered by the policy's PD provision.' 

The BI I EE provision applies to excess scrap produced after Coast 

became aware that continued use of its machines would result in the 

production of an increased amount of defective bags 

The parties dispute whether Coast knew that the continued 

use of its machines would produce an increased number of defective bags. 

Federal Insurance argues that as of October 2003, Coast was aware of the 

machinery and electrical problems and decided to continue to use those 

machines to manufacture bags, despite being aware that scrap would be 

produced at a higher rate than norma1. 2Coast contends that, while it 

became aware of electrical problems in September 2003 and of the 

resulting damaged bags in October 2003, it investigated those issues and 

only continued production after it was determined that the problems had 

been fixed. Coast further asserts that it was not until additional damaged 

'The record indicates that even under normal manufacturing 

conditions, at least some scrap was produced. Accordingly, coverage under 

both the BI/EE provision and PD provision will only apply to scrap that is 

produced in excess of the normal amount. 

2The record suggests that Coast normally produced around 8% 

scrap, which increased to upwards of 20% sometime after the electrical 

problems began. 

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bags were returned and additional investigation was conducted that it 

became aware of the full extent of the damaged machinery and the 

connection to the defective bags. It is undisputed, however, that Coast 

continued bag production throughout the relevant period in order to meet 

its obligations to customers. 

We conclude that the proper interpretation of the insurance 

policy is that the BI/EE provision applies to increased scrap produced after 

Coast became aware that continued use of its machines would result in 

the production of an increased amount of defective bags. The BI/EE 

provision applies to increased scrap produced after this date for two 

reasons. 

First, increased scrap produced after this date unambiguously 

fits the definition of an extra expense under the policy. The policy defines 

extra expense in relevant part as "necessary expenses you incur: in an 

attempt to continue operations, over and above the expenses you would 

have normally incurred." Defective bags produced after the date Coast 

was aware that continued production would lead to increased scrap fits 

the definition of an "extra expense," because it was an expense above that 

associated with normal production, which Coast incurred "in an attempt to 

continue operations" in order to fulfill customer obligations despite 

ongoing electrical problems. 

Second, scrap produced after this date cannot be categorized 

as property based on the implied requirement of fortuity; hence, it can 

only be covered under the policy's BITEE provision. It is well recognized 

that insurable loss of or damage to property must be occasioned by a 

fortuitous, noninevitable, and nonintentional event. See City of 

Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38, 47-48 (2d Cir. 2003); 

8 
Univ. of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1277, 1281 (6th 

Cir. 1995) ("The application of the implied requirement of fortuity [to 

insurance contracts] is universally recognized." (internal quotation 

omitted)); see also Avis v. Hartford Fire Ins. Co., 195 S.E.2d 545, 547-49 

(N.C. 1973). In other words, a loss occasioned by the insured's own 

decision to act in a way that will predictably result in a loss is not 

fortuitous; and thus, such a loss is generally not covered. See, e.g., Univ. 

of Cincinnati, 51 F.3d at 1282 ("[C]ourts generally do not recognize 

deliberate actions that produce predictable and anticipated damages as 

fortuitous events under all-risk insurance policies."). Further, the fortuity 

principle applies even if not explicitly written into the insurance contracts 

Thus, under the implied requirement of fortuity, the PD provision cannot 

apply to scrap produced as a result of Coast's decision to continue 

production despite being aware that damaged bags would be produced at a 

higher rate than normal. 

In sum, deciding when Coast became aware that continued 

production would lead to increased scrap is a factual question for the jury. 

However, once the jury determines when that occurred, the district court 

must then apply that fact and conclude, as a matter of law, that increased 

scrap produced after that date is covered under the insurance policy's 

BIJEE provision. 

3Here, Coast's duties under the policy included "ltlak[ingl every 

reasonable step to protect the covered property from further damage." 

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The PD provision applies to excess scrap produced before Coast 

became aware that continued use of its machines would result in the 

production of an increased amount of defective bags 

Here, the PD provision covered "direct physical loss or 

damage to . . . personal property caused by or resulting from a peril." The 

policy defines personal property as "all your business personal property; 

business personal property in which you have an insurable interest; 

patterns, molds and dies." Included in business personal property is 

"stock." The policy splits "stock" into four subcategories: (1) raw stock, (2) 

stock in process, (3) finished stock, and (4) goods held in storage for sale. 

"Raw stock" is defined as "material in the state in which you receive it for 

conversion into finished stock." "Stock in process" is defined as "raw stock 

that has undergone any aging, seasoning, mechanical or other process of 

manufacture, but which has not become finished stock." Finally, "finished 

stock" is defined as "goods you have manufactured which are in their 

completed state and ready for sale." 

The policy explicitly defines these terms because the loss 

payment basis for "finished stock" is different than the loss payment basis 

for "raw stock" or "stock in process." Specifically, the loss payment basis 

for "finished stock" is the "selling price less the value of discounts and 

costs you would have incurred." In contrast, the loss payment basis for 

"raw stock" is the cash valueS or replacement value, and the loss payment 

basis for "stock in process" is the "cost of raw materials and costs expended 

as of the date of loss or damage." Because of the different loss payment 

basis, damaged property that is deemed to be "finished stock" may be 

valued much higher than property deemed to be another type of stock. 

Based on the evidence presented at trial and the jury's award of more than 

$4 million for Coast's breach of contract claim, it can be inferred that the 

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jury categorized the increased scrap as not only property, but also as 

"finished stock." 

Federal Insurance argues that even if the increased scrap is 

covered by the PD provision, it cannot be "finished stock," because the 

defective bags were not "in their completed state and ready for sale." 

Federal Insurance argues that the bags were not "completed" because 

their defects resulted in them being returned. In contrast, Coast argues 

that the defective bags were "finished stock," because they had completed 

the manufacturing process and were sold. 

First, we conclude that the PD provision applies to excess 

scrap produced before Coast became aware that continued use of its 

machines would result in the production of an increased number of 

defective bags. The PD provision covers "stock" as business personal 

property. The policy's definition of "stock" refers to the goods Coast 

produced. Thus, Coast's "stock" included the plastic bags, defective or 

otherwise, that it was in the business of producing. Accordingly, the 

defective bags produced by Coast were business personal property covered 

by the policy's PD provision. 

Second, we conclude that the increased scrap that is covered 

by the PD provision unambiguously fits the definition of "finished stock," 

which is defined as "goods you have manufactured which are in their 

completed state and ready for sale." While the bags were ultimately 

returned to Coast because of defects, the defective bags had completed the 

manufacturing process and were sold to Coast's customers. In other 

words, the bags were in their "completed state," because there were no 

additional steps for Coast to take in the manufacturing process prior to 

sale. See Merriam-Webster's Collegiate Dictionary 254 (11th ed. 2007) 

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(defining "complete" as "having all necessary parts, elements, or steps"). 

Reading the policy as a whole, it is clear that the definition of "finished 

stock" was intended to include bags that have completed the 

manufacturing process but are ultimately returned for defects caused by a 

covered peril. This is evidenced by the fact that the loss payment basis for 

"finished stock" is the sales price of the goods. The policy provides that 

Coast be compensated for the sales price of the defective bags because, but 

for the covered peril—the damaged machinery—the defective bags would 

not have been returned and Coast would have realized the sales price from 

its customers. 

In sum, we conclude that the PD provision applies to excess 

scrap produced before Coast became aware that continued use of its 

machines would result in the production of an increased amount of 

defective bags. We further conclude that the excess scrap covered by the 

PD provision must be categorized as "finished stock," and should be valued 

as such under the terms of the policy. 

Determining which PD policy limit applies was a question of law for the 

district court to decide 

Coast originally had PD coverage of $2 million which it later 

increased to $5 million The parties now dispute whether the applicable 

PD policy limit is $2 million or $5 million. The district court left this 

decision to the jury. However, in Nevada, determining whether an 

insurance policy applies to ongoing property damage is decided using the 

"manifestation rule," a legal principle. See Jackson v. State Farm Fire & 

Gas. Co., 108 Nev. 504, 509, 835 P.2d 786, 789 (1992). Accordingly, we 

conclude that determining which PD policy limit applies presents a 

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question of law; and thus, the district court erred in sending the issue to 

the jury. 4Because determining which PD policy limit applies presents a 

question of law, this court will resolve the issue by making our "own 

independent determinations and [will] not defer to those of the district 

court." Musser v. Bank of Am., 114 Nev. 945, 947, 964 P.2d 51, 52 (1998). 

Legal determination of the PD policy limit 

Federal Insurance argues that the district court erred in not 

adopting a legal rule to govern the question of whether the increased limit 

applies. Federal Insurance further argues that under applicable law, the 

$2 million policy limit applies because Coast knew or should have known 

of ongoing property damage when it applied for the policy limit increase on 

August 27, 2003. In response, Coast argues that the jury's award of 

$4,005,866 in breach of contract damages implies that the jury found that 

the $5 million policy limit applies, and that such a finding is supported by 

substantial evidence. 

In Jackson v. State Farm Fire & Casualty Co., this court 

adopted the so-called "manifestation rule." 108 Nev. at 509, 835 P.2d at 

4The jury was given an instruction vaguely defining the 

"manifestation rule," but was not instructed on how this legal principle 

should be applied to its factual findings. Jury instruction No. 27 provided: 

[s]ometimes an event happens that causes 

continuing damage over time In such a situation, 

insurance coverage is provided by the particular 

insurance in effect at the point in time appreciable 

damage occurs, and is or should be known to 

insured such that a reasonable insured would be 

aware that his notification duty under the policy 

has been triggered. This is known as the damage 

manifestation rule. 

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789. Under the "manifestation rule," an insurer is only liable under an 

insurance policy if the policy was in effect when the loss became manifest. 

Id. at 506, 835 P.2d at 788. A loss becomes manifest at the "point in time 

when appreciable damage occurs and is or should be known to the insured, 

such that a reasonable insured would be aware that his notification duty 

under the policy has been triggered." Id. at 509, 835 P.2d at 790 (internal 

quotation omitted). Further, "[t]he manifestation date will generally be a 

question of fact" for the jury; however, a court can decide the 

manifestation date "where the undisputed evidence establishes that no 

damage had been discovered before a given date." Id. 

Here, the parties dispute when "manifestation" occurred. 

Because the date of manifestation is "generally. . . a question of fact," we 

conclude that determining when "manifestation" occurred is a question of 

fact for the jury to decide. See id. However, once the jury determines 

when "manifestation" occurred, the district court must then apply that 

fact to the law and determine which policy limit applies. Specifically, if 

the jury finds that Coast knew or should have known of "appreciable 

[property] damage" prior to increasing its PD coverage to $5 million, then 

the increase in coverage does not apply, and an award for breach of 

contract based on property damage cannot exceed $2 million. See id. 

(internal quotation omitted). In contrast, if the jury finds that Coast did 

not know or should not have known of "appreciable [property] damage" 

prior to increasing the PD coverage to $5 million, then the increase does 

apply and an award for breach of contract based on property damage 

cannot exceed $5 million See id. (internal quotation omitted). 

Coast's UCPA claim is dependent on a proper interpretation of the contract 

At trial, Coast presented evidence suggesting that Federal 

Insurance violated the UCPA, in part because Federal Insurance 

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incorrectly determined that excess scrap was covered under the policy's 

BI/EE provision. Thus, Coast's UCPA claim must await the district 

court's determination of how the excess scrap should be categorized under 

the policy pending the jury's finding of when Coast became aware that 

continued production would lead to increased scrap. FGA, Inc. v. Giglio, 

128 Nev. „ 278 P.3d 490,496 (2012) (holding that a verdict cannot 

stand where one of several "overlapping factual theories support a single 

theory of recovery" and one of those theories is challenged on appeal). 

Accordingly, judgment on the jury's verdict regarding Federal Insurance's 

liability under the UCPA is vacated, and the issue is remanded for a new 

trial. 

CONCLUSION 

First, we conclude that because contract interpretation is a 

question of law, the district court should have decided, as a matter of law, 

whether Coast's loss was covered under the policy's PD provision or its 

BI/EE provision. Thus, the district court erred in submitting this question 

to the jury. We further conclude that under a proper interpretation of the 

policy, losses incurred after Coast became aware that electrical problems 

would cause increased scrap to be produced are covered under the policy's 

BI/EE provision. Conversely, we conclude that losses incurred before 

Coast became aware that electrical problems would cause increased scrap 

to be produced are covered under the policy's PD provision, and should be 

valued as "finished stock." 

Second, we conclude that determining which PD policy limit 

applies is a question of law for the district court to decide. Specifically, 

once the jury determines when Coast knew or should have known of 

"appreciable [property] damage," the district court must then apply the 

"manifestation rule" and determine which policy limit applies to Coast's 

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, C.J. 

property loss. Once the policy limit is established, a breach of contract 

award based on property damage cannot exceed that amount. 

Finally, we conclude that because the jury's verdict on Coast's 

UCPA claim was influenced by an improper interpretation of the contract, 

the verdict must be vacated. We therefore vacate in part, and reverse and 

remand for further proceedings consistent with this opinion.' 

Gibbons 

Pickering 

Haraty 

nStressate, 

Parraguirre 

5Based upon our holding, we vacate the award of attorney fees and 

do not address the other issues raised by the parties. Although we could 

address the remaining issues of law raised, many of these issues depend 

on the insurance coverage issue. Therefore, we conclude that it is not 

appropriate to address them at this time. 

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